LULU - Nike: Moat Might Weaken Over The Long Haul

2024-07-13 08:48:37 ET

Summary

• Nike is rated as a hold due to unclear visibility of its long-term business model.
• CEO Donahoe's strategy of digitalization and DTC approach has not delivered expected results, leading to declining sales.
• Nike's brand may not be as strong as perceived, with competitors taking advantage of its strategy missteps.

I rate Nike (NKE) as a hold as there are certain factors that do not contribute to having a clear visibility of Nike's business model as a long-term investment. It seems like the strategy launched by CEO John Donahoe three years ago of accelerating digitalization and its direct-to-consumer approach ((DTC)) have put Nike in a hard position now. Some people might think that Nike's competitive advantages are associated with its well-renown brand, but that's wrong, as the apparel and footwear industry is extraordinarily competitive, where design, comfortability, performance, and fashion can play a more important role than the brand itself. I will elaborate on this important factor, as, in my particular view, a company whose competitive advantages cannot be easily identified is one with an unpredictable business model for the long haul. Maybe Nike could be attractive for investors who like to hold the stock for months or a year, but for those who like to hold it for more than 5 years, it's very important to know the dynamics of the competitive advantages, which are difficult to identify for a company like Nike. These difficulties let the CEOs have a low margin of error in the design of the company's strategy, which can be the case with Nike.

Context

Nike's revenue growth was 1% in FY 2024 YoY on a currency-neutral basis and only 0.23% when counting the effect of the currency. Net income grew 12.43% YoY and operating income grew 6.69% YoY in the same period....

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